When The Minimum Wage Was Higher, Unemployment Was Lower

Why Would The Minimum Wage Pack More Disemployment Punch Today Than In The 1960s?

If there's one thing I've learned reading up on the economics research on the minimum wage it's that you can find empirical studies bolstering either side of the argument. Officially the disagreement between the papers hinges on methodological issues, but it sure at least looks like scholars' views on the methodology are lining up very conveniently with their ideological priors. So a question I always want to hear from people who think about these things is not just what do they think happens, but why?

In that view, I think the strongest case for a higher minimum wage comes not from recent empirical work but from history. Back in the 1960s the minimum wage was higher than it is today ($10.52 or $9.22 depending on which inflation index you use) yet overall wages and labor productivity were lower. And the unemployment rate was considerably lower in the 1960s than it's been in recent decades. Not just lower than it's been since the financial crisis, but lower in general than the unemployment rate of the Great Moderation years. So I think a natural question to ask is what's allegedly changed about the American economy over the past 50 years to give higher minimum wages a stronger disemployment punch?

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When I tweeted about this last night the main responses I got back were globalization and technology. Globalization sounds plausible, but if you look at minimum wage jobs you don't see minimum wage workers in the tradeables sectors. They're working at fast food joints or retailers or they're cleaning toilets. If you want cheap labor to produce tradeable goods you go someplace so cheap that the minimum wage will never be low enough to make America competitive. And on technology, the change should go in the other direction. Overall productivity is higher than it was 50 years ago because we have more capital goods and more technology. That's why average wages are higher. In the long term, that's why people earn more in 2013 than they did in 1913 or 1813.

I could think of some other, more plausible reasons. For example, in the 1960s you perhaps had a monetary policy regime that was less tolerant of unemployment and more tolerant of inflation. But that to me sounds like a reason to change the monetary regime. It's also true that in the 1960s even though the unemployment rate was lower, you did have a smaller share of the population working. You could think of that as people being so locked out of the labor market that they didn't even count as unemployed, or you could think of it as working class women's husbands earned enough money to support a family without a second paid worker. It would surprise me enormously if higher low-end wages magically restored 1960s gender norms, but there is a complicated interaction between the labor market and family life where I don't think you can simply take either as "given."